Forex Blog: Currency Trading News & Analysis.

January 17th 2008

Economist: Fed Should Prop Up Dollar

In a recent editorial published in the Wall Street Journal, the Chief Economist for Bear Stearns (an American investment bank) advocated intervention by America’s Federal Reserve Bank on behalf of the Dollar.  He reasons that the best way both to fight and inflation and alleviate the possibility of recession is to strengthen the USD.  Current measures, which include lowering the discount rate and manipulating the money supply, are actually worsening inflation.  As a result, institutional investors are moving their capital en masse outside the US in order to prevent the declining dollar from corroding their investment returns. While paying lip service to the prevailing wisdom that Central Banks are essentially impotent when it comes to managing currencies, he insists that strong rhetoric by the Fed could conceivably convince investors that it stood behind the "Strong Dollar Policy" it promotes.  The Wall Street Journal reports:

By saying they want a stronger dollar, the Fed…could make it happen. Government policy makers have almost absolute control over perceptions of the future scarcity of dollars. This controls the demand for dollars almost as much as it does the supply, setting its value as much or more than rates do.

Read More: Markets and the Dollar

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Posted by Adam Kritzer | in Central Banks, Politics & Policy, US Dollar | No Comments »

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